Consumer prices do the dipsy doodle

The Labor Department reported that rising energy costs drove consumer prices 0.4 percent higher in November following a gain of 0.3 percent in October and, on a year-over-year basis, the official rate of inflation in the U.S. now stands at 1.8 percent.
This is a far cry from the negative annual rates of inflation reported over the summer, rates that reached a low of -1.9 percent in July at the peak of the negative year-over-year energy price comparisons.

Of course, during the second half of 2008, energy prices tumbled, so, instead of comparing to 2008 gasoline that cost over $4.00 a gallon in July, those comparisons are now being made against $2.00 a gallon prices in November.

Recall that energy prices continued to decline through the end of last year, gasoline reaching a low of about $1.60 a gallon in mid-December, so the year-over-year increase in energy prices to be reported next month will be even more extreme.

Last month, energy costs rose 4.1 percent, the sharpest increase since August, and are now up 7.4 percent from a year ago. Gasoline prices jumped 6.4 percent in November and are almost 24 percent higher than last year at this time.

But, it's not just energy prices that are rising as medical costs continue to increase at a healthy pace, up 0.3 percent last month and 3.5 percent from a year ago as shown below.
Unfortunately, for those thinking that we're headed for a repeat of 1970s style inflation, with rent and owners' equivalent rent (the government's poor proxy for home ownership costs) accounting for almost a third of the overall price index, that's not likely to happen anytime soon.

The shelter component of price index (within the housing category) now seems to be completely broken, but in a good way if you're in favor of reporting only modest changes to consumer prices. As rents nationwide continue to fall, the Labor Department shows them rising by about one percent over the last year. This follows years of annual increases of about two percent when the housing bubble was in full swing and home prices were rising by 8, 10, or 12 percent per year.

Of course, most economists will point to today's "core" rate of inflation - where the broken shelter component accounts for a whopping 40 percent of the index instead of just 30 percent - and then claim that prices are stable.

Compared with a year earlier, consumer prices excluding food and energy were up 1.7 percent in November, matching the year-over-year gain in October. In fact, judging by the "core" rate of inflation - a measure that has not strayed beyond the one percent to three percent range for the entire decade - you'd have to think that the central bank has done an outstanding job in keeping prices in line.

If only they could have done as good a job at keeping asset bubbles in line...